United States Institute of Peace

The Iran Primer

Iran’s Subsidy Reform: RIP

           In November 2012, Iran’s parliament suspended subsidy reform and is now unlikely to allow “drastic increases” in the price of consumer staples over the next year, according to a new report by Jahangir Amuzegar. President Mahmoud Ahmadinejad launched a phased reform plan in 2010 that was designed to cut back government subsidies of basic commodities dating back to the 1980s. But the plummeting value of Iran’s currency—now nearly 30,000 rials to the dollar, less than half  its value just a year ago, could triple the price of staples such as wheat, sugar and flour.
            Price hikes could also have a rippling impact on Iran’s troubled economy as well as politics just six months before a presidential election. So the regime has opted to maintain subsidies at least for the time being. The following are excerpts from the Middle East Economic Survey by Amuzegar, a former member of the International Monetary Fund Executive Board, followed by a link to the full text.
 
            On 13 November 2012 the Islamic Republic’s Majlis (national assembly) voted to “suspend” the second phase of the Targeted Subsidies Reform Act of January 2010 – thereby halting further price increases in public utilities (food, fuel, water, electricity) and further rises in monthly welfare cash payments to households during the current Persian year (March 2012-March 2013). Thus a program that had been announced with the greatest fanfare in December 2010 as the center-piece of President Mahmoud Ahmadinejad’s “Great Economic Surgery” (MEES, 24 November 2008) came to an inglorious end with hardly a whisper…
 
The Program: From Birth to Suspension
           Since coming to power in 1979, Iran’s Islamic government has been subsidizing the production, consumption, distribution and export of various goods and services. By the end of the first decade of the 21st century, these public subsidies – both explicit (budgeted) and implicit (ie foregone opportunity values) – had reached 25% of the gross domestic product. While some of these subsidies (such as food and medicine) played a useful role in raising child nutrition and reducing infant mortality, as a whole they resulted in wasted resources, profligate consumption, air and water pollution, environmental decay and the continued use of outmoded technologies.
The urgent need for subsidy reforms was thus a matter of national consensus, because the status quo was intolerably costly, wasteful, unfair, counter-productive and altogether unsustainable…
 
The Second Phase
           Claiming that 70% of subsidies still remained to be “reformed,” President Ahmadinejad told the press corps in early January 2012 that the second phase of the program would start before the end of the Iranian year on 20 March 2012.  There were other signs that the government intended to launch the second phase with even greater vigor. The Price Monitoring Board intensified its surveillance of the market, and some $24bn was set aside by the government to be used for stockpiling essential goods during the year. In the first week of Iran’s new year (late March 2012), a sum of IR280,000 was also deposited in the bank accounts of some families for each of its individual members—reminiscent of the same gesture before the first phase. Responding to widespread complaints by the Iran Chamber of Commerce regarding the neglect of the production sector, government officials promised to remedy the situation through direct financial assistance, low-cost loans and price rise allowances…
 
What Next?
           The Majlis’ November 2012 act only “suspends” the program’s second phase and presumably does not terminate the reform initiative.  In fact, the head of the Subsidies Reform Headquarters has told the press that the government will shortly propose the resumption of the new phase in the context of the forthcoming (2012-2013) fiscal budget, and hopes to reach a satisfactory compromise with the legislature. Yet under the current circumstances, the Subsidies Targeting scheme-- in its January 2010 form – is to all intents and purposes dead. Given the current official inflation rate of nearly 25% (caused mainly by excess domestic liquidity as well as international sanctions), the banking system’s latest record of non-performing loans and the growing current budget deficit, no prudent legislature would dare allow further drastic increases in the price of basic consumer staples. And given the rial’s dramatic devaluation (MEES, 6 August, 2012), the original statute would be nearly impossible to carry out.  Under this act, the prices of gasoline and other subsidized items were to be gradually raised to international levels (ie no less than 90% of their fob prices on the Persian Gulf). With the dollar/rial rate at the time of the legislation hovering around $1=IR10,000, the five-year price adjustments required a four to five times increase in the price of most items. Now, with the exchange rate nearing $1=IR30,000, compliance with the act’s original provisions would require a further threefold increase, which would be well-nigh prohibitive. Any new subsidies reform initiative would therefore have to start from scratch.
 
 

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